What is Liquidation

Liquidation is the closure of a limited company. A liquidator is appointed to sell the assets and collect any debts owed. If the company is unable to repay its debts the process is called Creditors Voluntary Liquidation (CVL).

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How does Liquidation work?

Once the directors have decided to Liquidate a company they must first appoint an Insolvency Practitioner (IP). The IP calls a creditor’s meeting to appoint a Liquidator. The Liquidation process can then get underway.

The Liquidator works to get the best outcome for the creditors. Their job is to realise as much cash from the company as possible. They must sell as many assets as possible and take action to collect in any outstanding debts. They must also stop the company incurring further costs. This normally involves making any employees redundant and cancelling ongoing supply contracts.

If the company has sufficient assets to repay all of its debts it is not insolvent. In this situation a slightly different form of Liquidation is used. This is known as a Members Voluntary Liquidation (MVL).

What happens to the company’s debts after Liquidation?

If a company has outstanding debts the Liquidator will try to repay as much of these as is possible. They will first pay their own fees and any secured creditors. Any employees will also receive limited redundancy payments.

Then if there is any cash remaining this is divided between the unsecured creditors. Given that the company is insolvent the unsecured creditors will normally only get a small percentage of what they are owed if anything at all. There is nothing they can do about this.

Unsecured creditors who have not been paid due to Liquidation have to write off the debt they are owed. Unfortunately this may result in them running into financial difficulties themselves. Some may even be forced to close if they are heavily reliant on the company that has been liquidated.

Is liquidation the best Company Debt solution?

You can only understand whether Liquidation is a sensible course of action after a proper review of the company circumstances. If you believe the company is still viable you could consider a Company Voluntary Arrangement (CVA). This would reduce debt repayments to a manageable level.

Alternatively you could consider a Pre Pack solution. This is where you sent up a new company to buy the assets of the old. This then trades in the old company’s place but with the advantages of not having any debt.

As a director if you believe your company is insolvent you should not wait too long to decide the action you will take. You have a duty to minimise any creditor losses. If you allow the company to continue to trade while it is insolvent you could be guilty of wrongful trading. This may then result in you being disqualified as a director or even personally liable for the some of the company debts.

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